MASTER LIMITED PARTNERSHIPS

Monday, October 06, 2008

I think that pretty much sums it all up! Off the lows at the close with the MLP index at 190 and a few ticks. Dow rallied back in the last hour from minus 800 to minus 355.

4 comments:

snv61 said...: You forgot one more word...ME!; 10/06/2008 7:20 PM
Anonymous said...: More on the Frozen Bond Market from WSJ.

This will imho be known as Paulson's + Bernanke's "Moral Hazard"Debacle.
Killing Lehman's bondholders and counterparties ( not to mention the GSE prefered shareholders, and WM holders ) was the policy mistake that destroyed the trust
that is required for the credit system to function.

HS

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The corporate bond markets are at a standstill. Unsettled by counterparty worries in the wake of the Lehman Brothers bankruptcy and concerned about the economy, bond investors are sitting on their hands.

Highly rated companies, already facing difficulties accessing short-term funds, are now also shut out of longer-term markets. That cuts off an important source of financing for corporate America at a time when analysts estimate $750 billion of financial debt will mature in 2008."

http://online.wsj.com/article/SB122330258971907693.html?mod=yahoo_hs&ru=yahoo; 10/06/2008 9:02 PM
Anonymous said...: WSJ article dated Oct 2, 2008.

I like the "Safety" part.

HS
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"Energy MLPs Offer Safety, Tax Benefits"

Those wishing to avoid as much tax as possible, and nab a decent dividend yield, might instead consider master limited partnerships

http://online.wsj.com/article/SB122288942421195247.html?mod=yahoo_hs&ru=yahoo

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Also Jubak adds OKS to his picks today,
in his article entitled "Everything's changed now -- for the worse."

Updates to Jubak's Picks
Buy Oneok Partners (OKS, news, msgs). The financial crisis has hit shares of Oneok Partners hard, with the share price falling 27% from Aug. 29 through Oct. 6. That has driven the dividend yield on this master limited partnership to 9.6%. In today's market, of course, you don't want to buy anything just because it's down in price. You need to figure out the "why" of the drop in price and believe that the market is wrong. In this case, I believe the culprit is the strange nature of master limited partnerships themselves.

Master limited partnership units trade on the stock exchange just like a regular stock, but a unit holder actually owns a piece of a limited partnership with no role in the operations and management of the company. The limited partnership is entitled to cash distributions that are then passed on to unit holders. Taxes on the distributions from master limited partnerships get special tax treatment that usually shields 80% to 90% of the distribution from taxes until the unit holder sells.

There is the possibility that Oneok Partners has dropped in price, along with most master limited partnerships, because investors are worried that the company won't be able to fund its $1.2 billion capital budget because of turmoil in the financial markets. That actually doesn't seem to be a problem for Oneok Partners, given that the partnership has a healthy cash flow and has actually been reducing its financial leverage.

And there is the possibility that investors have sold off the units because of fears that lower energy prices will reduce revenue and earnings at the pipeline company. But that doesn't seem like a reasonable fear, since pipeline companies make their money on the volume of oil -- or in this case natural gas -- shipped and not on price, and since natural-gas demand has been up in 2008 even as the price of gas has fallen.

I think the most likely explanation for the price drop is that the biggest owners of master limited partnerships are the hedge funds and investment banks that have been hit hardest in the financial crisis. These investors have been selling off assets to raise capital, often at fire-sale prices, and other investors haven't yet stepped in to fill the gap. If I'm right about the cause of the drop, then these units are indeed on sale. The company has major new pipelines set to go into operation in 2008 and 2009. That should increase cash flow and distributions to unit holders.

As of Oct. 7, I'm adding these units to Jubak's Picks with an October 2009 target price of $52 a share. Buyers will also get that 9.6% yield while they wait. (Full disclosure: I own units of Oneok Partners in my personal portfolio and will buy more three days after this column is posted.)

http://articles.moneycentral.msn.com/Investing/JubaksJournal/everythings-changed-now-for-the-worse.aspx?page=3; 10/06/2008 10:19 PM
Anonymous said...: this cover is great...actually made me laugh after a gut wrenching day.; 10/06/2008 11:24 PM